Ladies and gentlemen, welcome to the Gränges Acquisition on Noranda's Downstream Division event conference call. Today, I'm pleased to present Johan Menckel, CEO, and Oskar Hellström, CFO. For the first part of this call, all participants will be in a listen-only mode, and afterwards, there will be a question and answer session. I will now hand the conference over to Johan Menckel. Please begin your meeting, sir.
Thank you. Yes, good morning, ladies and gentlemen, and welcome to Gränges conference call. Here in Stockholm, it is me, Johan Menckel, CEO of Gränges, and CFO, Oskar Hellström. Yesterday afternoon, we announced that the acquisition of Noranda's Downstream division now has been approved by the U.S. Bankruptcy Court, and we have received the court order, meaning that it is finally a done deal for us. As you know, the sales hearing has been postponed a number of times this summer, as there have been discussions about how the purchase price should be distributed among Noranda's creditors. Nothing that has any effect on us or the assets we are buying. Today, we would like to take the opportunity to explain the transaction in more detail, and also answer any questions you may have. We are buying Noranda's Downstream division in the United States.
The transaction is structured as an asset deal, valuing the business and related assets to $324 million on the debt and cash-free basis. That corresponds to an EV/EBITDA multiple of 6.2, based on a pro forma earnings for 2015, meaning we are able to close this deal at a very attractive valuation. The acquisition is an important step towards realizing our targets for 2020, making Gränges a truly global player in our industry. When summarizing this transaction, I first want to point out that the Noranda asset was our preferred target in North America. It has several advantages for Gränges, which I will come back to shortly. As said, the price we pay makes this transaction a very attractive opportunity for Gränges. Already the first year, the acquired asset is expected to contribute to earnings per share.
The logic behind this deal is foremost about established own production facility in North America, which has been on our agenda since the IPO two years ago. We're not only getting a plant, we got one of the most advanced rolling mills in the Americas. At the same time, we are strengthening our position in the strategic HVAC&R market considerably and get access to the new attractive market segment within rolled aluminum products. The transaction is fully financed by bank loans from Svenska Handelsbanken and Danske Bank. There are currently no plans to utilize the mandate from the annual general meeting to issue new shares to help finance this transaction. Closing is expected on August 22nd, which is only a few days from now. A short update on what we are buying.
The transaction includes the assets and related business conducted in Noranda Aluminum Downstream division, which has a strong track record in terms of sales and profitability. Noranda's other division, the primary aluminum production, also referred to the Upstream business, is not included. These two divisions have historically been operated separately in the Noranda group. Due to financial problems within the Upstream division, Noranda initiated a Chapter 11 process in February this year. As a part of the process, Noranda was seeking to divest the Downstream aluminum rolling division. Noranda's downstream rolling mills are located in Southeast U.S., which is a very good location from a logistic perspective, close to their customers, but also close to most of Gränges' current customers in North America. Noranda's Downstream division is a well-managed business, which has a proven track record of several years with stable sales and good profitability.
Last year, sales volume reached 172,000 tons, making it slightly bigger than Gränges in terms of volume. Earnings Before Interest, Taxes, Depreciation, and Amortization, EBITDA, was $52 million on a pro forma basis. In that figure, we have included adjustments to mirror the conditions the Downstream business would face being a standalone from Noranda. In total, the three facilities employ about 550 people. Today, Noranda is serving a number of attractive niche markets where it holds a strong market position. About half of the sales volume goes to customers in the HVACR segment, of which a smaller part is for automotive heat transfer material. This is something we value high as we view the HVACR market being one of our strategic end markets going forward. Today, Noranda has a number one position in this field in North America.
Noranda also holds a number one position within transformer windings, while being a number two in the semi-rigid container used for food packaging. A fourth segment is heat shields for automotive industry. Noranda's Downstream assets consist of two aluminum rolling mills, the large one in Huntingdon, Tennessee, and the smaller one in Salisbury, North Carolina. The Huntingdon facility was through a major expansion in year 2000, making it the most advanced and efficient rolling mill for light gauge materials in North America. The equipment constitutes a full production line from casting to cold rolling mills and finishing. That also goes for the smaller facility in Salisbury that has a full production line. Besides the rolling mills, Noranda has a small surface treatment plant in Newport, Arkansas. In this facility, additional properties are added to the rolled aluminum in a chemical process.
This is only a small complementary offer to some customers that require surface treatment. When looking at the logic behind this deal and why we view this as an outstanding opportunity for Gränges, to expand this presence and create value for our stakeholders, I want to start with our current promise. Our vision is to transform the world through innovative aluminum engineering. Our business concept states that we should be a global aluminum company and the market leader in advanced materials for heat exchangers. Our ability to provide lighter, more designable solutions in order to increase economic efficiency is what is driving demand for our products today. At our Capital Markets Day this spring, we presented updated goals and strategies for 2020. Our ambition is to show a higher growth rate than the market, while maintaining a good and sustainable profitability.
By 2020, we should be the market leader in all geographical regions. The acquisition of Noranda Downstream is an important step towards this goal. We get our own production facilities in the region. We will also expand our presence into adjacent market segments, which has been on our priorities, as well as strengthening our position in the HVAC&R market. On top of that, we get a very well-run business that already today have a clear focus on efficiency measures and being a sustainable link in the value chain, including health and safety, thus contributing to maintaining a good and sustainable profitability. We have summarized the main strategic rationales behind this deal, although the list of benefits for Gränges is long. First, with Noranda, we get one of the most advanced rolling mill in North America.
The new production line at the Huntingdon facility is one of the best assets in this class. We also get a highly experienced and skilled organization that has proven to manage these operations very well in recent years. That is, of course, of great value. The Noranda assets, and in particular, the Huntingdon facility, will provide an excellent platform for our future growth in North America. It also means we will be able to reduce risk and cost of supplying our existing customers in North America. Secondly, I would like to highlight Noranda's strong position on the North American HVAC/R market. Today, Noranda is the number one supplier in this field. HVAC/R is a strategic end market for Gränges. With a strong customer base in this area, we will be well positioned to drive conversion to the braze technology solutions.
Third, with Noranda, we get an existing business in adjacent segments within aluminum rolled products, segments where Noranda today has a very good market position. For us, this means that we will diversify our business portfolio and at the same time strengthen our position in the overall market for rolled aluminum products. Just very short on the combined company presence. Gränges is today serving a global market from two production facilities, one in Shanghai, China, and one in Finspång, Sweden. The Americas has so far been a wide spot for Gränges in terms of production. With many large global customer, it is important for us to be a global player and offer local production on all major markets. As you can see, the geographical fit between Gränges and Noranda is very good for establishing a truly global company.
In total, we will have a combined production capacity of some 400,000 tons spread over three continents. Local production in North America is key for us to be able to gain market share in automotive heat exchanger materials in this region. Since Noranda already today have some smaller volumes going into automotive heat exchanger materials, our market share in North America will increase a few percentage points already day one. However, mid to long term, our ambition is to expand capabilities on site to be able to also produce clad products. While Noranda today have a full production line for unclad product that is efficient and serves their purpose very well, certain upgrades will be necessary to be able to produce the same kind of multilayer products we do in Finspång and in Shanghai. That will require that we add a direct chill casting and hot rolling mill.
Our plan is to start a pre-study regarding this upgrade after closing. To be able to evaluate and prepare for a possible future investment, the pre-study is anticipated to take one to one and a half year to conclude. However, we will not start any larger investment projects until our net debt is back on our target range, 1 to 2 times EBITDA. As said before, Noranda's Downstream operation was our shortlist of targets for the expansion in North America. We have been looking at these assets before, and when they came up for sale this spring, we immediately view this as a great opportunity for Gränges. It's easy to line up benefits we see with this transaction. The strong management team and highly experienced organization is of great value. We get production facilities that is very efficient and have a good location from a logistics perspective.
Important, there are further land available at the Huntingdon facility which makes an upgrade possible later on. All together, these factors will reduce our risk and time to market for us in the Americas. I also want to highlight Noranda's strong position in the HVAC&R market. HVAC&R is a strategic end market for Gränges and growth area for us in the coming years. While the automotive market is already fully converted to braze technology due to superior properties when it comes to efficiency and reduced environmental impact, the HVAC&R market is still using the old technology. We foresee a conversion also in the HVAC&R market in the coming years as the requirement on these units will increase due to new legislations. Today, only a few % of the market are converted to braze technology.
A reasonable estimate is that about half of the market has potential to convert to braze technology in the coming years. Noranda holds a number 1 position within HVAC&R in North America, with a market share representing more than half of the market. For us, this means that we get access to a very attractive customer base. By serving these customers, Gränges will be in a good position to further drive the conversion towards braze heat exchanger in the HVAC&R industry. At the same time, we will be able to enjoy current business until the conversion is achieved. Our ambition is to take a leading role in the future development of this market, and together with our customers, develop new efficient materials and solutions in this field.
This slide illustrates Gränges today and the combined Gränges and Noranda businesses, and show that we will get a more diversified business portfolio post-transaction. Heat exchanger materials for automotive, which is more than 90% of our business today, will be less than half of our volume. We're looking at the sales split for 2015 numbers. At the same time, products for HVAC&R segments will increase, bringing the share of heat exchanger material to around 70% for Gränges. Gränges will get a more balanced business portfolio, creating a larger and stronger platform going forward. We also get less dependent on a certain end market segment, thus spreading our risk, both geographical and end market-wise. This doesn't mean we will pay less attention to the automotive going forward. On the contrary, it will allow us putting even more efforts in this area, being a part of a bigger and stronger global company.
When looking at Gränges and Noranda Downstream combined, we will form a company with strong earnings and cash generation. Sales volume on a pro forma basis for 2015 was 336,000 tons, double the size of Gränges. Net sales was $1.2 billion, or more than SEK 10 billion. Adjusted EBITDA sum up to SEK 1.2 billion on a pro forma 2015 basis. We expect this business to continue to show a positive result, meaning it will be accretive to earnings per share already the first year. Looking at 2016, we expect the acquired business to be neutral in terms of earnings per share if you take into account the cost we have had, and will have for this transaction, including integration costs.
In Q2, we took SEK 25 million in cost for the acquisition, and we expect about the same amount of cost to occur during second half of 2016 as the transaction and integration is being finalized. The transaction is fully financed with bank loans from Svenska Handelsbanken and Danske Bank that provided a term loan of $300 million. In addition to that, we have signed an agreement for a multicurrency revolving credit facility of SEK 1.2 billion for general corporate purposes. The term loan and RCF is on prevailing market conditions. We expect our financing cost to increase by SEK 20 million per quarter given today's base rates and FX rates. Gränges net debt was SEK 0.3 billion at the end of June this year. Including the new debt financing, we would have a net debt of about SEK 3.1 billion.
That corresponds to about 2.5x EBITDA, including pro forma numbers for 2015 for Noranda Downstream as a standalone entity. We estimate that we will be back in our target range of 1.2x EBITDA already in 2018. Currently, there are no plans to utilize the mandate given by the annual general meeting to issue new shares in Gränges. We have formed a new organization in North America. As was announced this morning, Patrick Lawlor has been appointed President Americas for Gränges, effective as of closing of the transaction. Patrick will be a member of the Gränges group management team. I'm convinced Patrick is the right person heading our American operations going forward. He has a great experience that is valuable for us, both when it comes to our industry, the American market, and to integrate acquired businesses in a successful way.
I'm glad Patrick has accepted to take on this position. Daniel Daoust, former President Americas, will continue as Vice President Sales of Automotive Heat Exchanger in the Americas. Scott Croft, currently heading the Noranda Downstream operations, will take on the position as COO at the time for closing. We are very happy that almost all key Noranda employees have accepted to continue in the new Gränges Americas organization. To conclude this presentation, we are pleased to announce that we have been able to close this transaction at a very attractive valuation. The price we pay values the Noranda Downstream operation to $324 million on a cash and debt-free basis, corresponding to an EBITDA multiple of 6.2x pro forma 2015 earnings.
Noranda Downstream has been on our number one target when looking for expansion opportunities in North America. As said earlier, this come up with a number of advantages for Gränges. We will get the production footprint in North America we have been longing for, and at the same time strengthen our position in the HVAC&R market considerably. We will also broaden our portfolio with new attractive end market segment. This acquisition is an important step towards our goal for 2020, making Gränges a truly global player in the aluminum rolling industry. Thank you for listening this morning. Now we are ready to open up for questions.
Thank you, sir. Ladies and gentlemen, if you have a question for the speakers, please press zero followed by the one on your telephone keypad. Once again, it's zero followed by the one on your telephone keypad. The first question comes from John Holtner from Handelsbanken. Please go ahead. Your line is now open.
Thank you. My first question is on Noranda and capacity. It seems like they are running on almost full rolling capacity. I wonder what is the opportunity here to increase capacity and particularly melting and die casting capacity, how does that look?
Okay. Hi, John. This is Oskar Hellström speaking.
Hi.
No, I think that is a very good observation there. Noranda Downstream is running at a high capacity at the moment and has been doing so for the last couple of years. In regards to this, I think we can comment that the reason for this is, of course, that they have been very successful in filling this business and also optimizing the usage of the capacity. That said, we are acquiring this business to get a foothold in North America, and we intend to further develop it. It is not unlikely that additional capacity can be released by rather modest investments, but this is something that we have to determine and confirm later on.
Okay. If I understand it right, the expensive part is melting and die casting capacity. Those types of investments are the expensive ones, and to add some rolling lines is less expensive. How does the melting and die casting capacity look like?
Very good question. I think there are two things we need to separate here, of course. One, capacity is very dependent on the product mix also, and what type of products we are running. As Johan also mentioned earlier, in the longer perspective, we have the intention to continue to develop this business, in order to also produce cladded material, and in order to do that, you need to invest in basically direct chill casting and hot rolling, and that are two capabilities that Noranda currently not have. That would be relatively large investments, you are right. We are starting a pre-study to determine what type of investments we would have to make and exactly what those would look like.
I think what we can say that in the order of magnitude, if you want to add these capabilities in a longer perspective, it's an investment of $150 million-$200 million or so. Again, I think we also need to reemphasize here that this is a longer term perspective. We have no intention of making such an investment before we have finalized a thorough pre-study and before the net debt will be back in our target range.
Just to make sure that I understood this correctly. To get production capacity in place in the U.S. for your clad material, investments of USD 150 million-USD 200 million in that range would be required?
If you want to have the full production chain, meaning then investments in direct chill casting and hot rolling, that is an order of magnitude number for that. That doesn't mean that we cannot produce clad material in North America by shipping semi-finished products from our current production in Sweden or China and finalize the product in North America. This can be done in steps as well.
You could do the cold rolling in America, but do the die casting and hot rolling in your Finspång or Shanghai facilities?
That is certainly an option, and that is an option that is already better, of course, than our current setup. Yeah, that's right.
It's Johan here. Capacity very much depend on product mix, thickness, and width, et cetera. Of course, there is a potential to review the product mix, and there is also potential, of course, to release bottlenecks in the current footprint. I think it's important then also to say that this platform is an excellent platform for further expansion. We have the infrastructure, land, and workforce, et cetera, and foundations in building. That means, of course, that you could also increase capacity with minor investments going forward. That is something that we, of course, will look into immediately after closing.
There's no melting or die casting capacity in Noranda that you could use and then add on your hot rolling and cold rolling capacity to produce your clad materials today.
Noranda has casting capacity. One of the things we will look at in our pre-study, of course, is how this can be developed further. We need to highlight here that Noranda is a business that has a full production chain from A to Z, basically, in terms of rolling production. There is no immediate investment needs, of course, to continue the current business.
Sorry to linger on this, I'm just trying to understand. If you look at the Salisbury facility, for example, which seems to have the full production chain, could that be converted by adding some hot rolling capacity and then the cold rolling that you want for your core assortment in Europe or China? Could that particular plant be converted without new casting and melting capacity investments to produce cladded material?
You would have to make investments also in the casting field, but a lot of the equipment that you need to do aluminum rolling is in place in both the rolling facilities of Noranda. Both facilities could be converted to clad production. Both are very good aluminum rolling mills.
Interesting. My final question, is there a big difference in the profitability of the Huntingdon plant and the Salisbury plant?
I think that the way Noranda has operated these two mills in the past is like a system. They have optimized production across these two plants and looked at the profitability on a total level rather than individual plant. That's a good question for Gränges how to operate this going forward, but what we can say is that this is a system that works very well today.
Okay. Thank you. That's all for me.
Thank you.
Thank you.
Thank you once again, ladies and gentlemen. To register for a question, it's zero followed by the one on your telephone keypad. The next question comes from Kenneth Tong from Carnegie. Please go ahead. Your line is now open.
Thank you. I have two questions. One is on cost synergies. Is there anything you can do by combining these assets in terms of purchasing or in terms of logistics in North America or back office administration there? That's the first question. The second one is, what kind of depreciation do you think will be in the Noranda operations? Sorry, a third question is, how will you report this? Will Noranda be a business unit, or will you include the shipments and sales and so on in your Gränges North American operations?
Hi, Kenneth. It's Oskar here. Very good question. I think in terms of cost synergies, since Gränges only have a small sales company in the U.S. today, the cost synergies from combining Gränges and Noranda businesses in North America will be relatively small. Of course, we will combine back offices and so forth, but this is not a big cost item at this point. The synergies, I would say, rather would occur from the fact that this gives us a manufacturing base in the U.S. and a stronger position in the market. Something to build on from a commercial perspective, rather than just cost reductions. Regarding your question on depreciation, I think it's a little bit too early to comment on exactly what this will be because we haven't done the final purchase price allocation on the individual assets yet.
As an indication, the historical depreciation of the assets that we have acquired when they were owned by Noranda was about $16 million or slightly lower than SEK 140 million per year. It's likely to believe that this depreciation will be slightly higher going forward as there is a difference between the current book value of the assets and the purchase price. You can see this as an indication, but it will most likely be a little bit higher. In terms of reporting, we only have one segment today as you know. Noranda will be included in this segment and reported as a part of the Americas region. We intend to explain the contribution and so forth from Noranda, but we will not report it as a separate segment or business area, at least not initially.
I also think that when doing this type of relatively large transaction, it is natural that the segment reporting is evaluated, and this is something that we may do later on.
You will at least report the Gränges product tonnage in North America and also the Noranda tonnage in North America to begin with?
Yes. Initially, we will for sure separate between the two so it is possible to see what the acquisition is contributing with there. Yes.
That is good. Thank you.
Thank you. There appear to be no further questions. I return the conference back to you.
Okay. Yeah. Thank you everyone for calling in and for interesting questions. Of course, the next update we will have is when we will release our Q3 report on October 27. Thanks a lot for calling in today, and looking forward to the next.